Dollarama (TSX:DOL) is amongst the hottest low-volatility stocks in the Canadian stock market and is often considered a top value stock. This dollar store giant has continued to outperform, leading to a relatively high valuation multiple of around 30 times. Accordingly, some investors may fail to see the underlying value of this stock and may consider the company more of a mature and slower-growth stock.
That said, there are reasons why this stock has increased more than 20% over the past year and why the company’s valuation may be better than some think. Let’s dive into why this stock is worth a look.
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A defensive business model worth considering
Dollarama is a Canada-based retailer focused on the discount segment. The company sells a wide range of day-to-day consumer products, from cleaning products, party supplies, beauty products, toys, plastic, and paper to seasonal merchandise. The company offers confectionery, gift cards, glassware, arts and crafts supplies, stationery items, greeting cards, pet food, and more.
For those shopping on a budget, Dollarama has proven to be a go-to option, particularly in metro and medium-sized cities. The company’s durable long-term sales growth strategy, focused on new store openings and an expanding presence across Canada, lends itself well to Dollarama being viewed as a safe haven among retailers.
If the economy deteriorates, one could make the argument that Dollarama could see further strength. Thus, this stock is often viewed as one with a very defensive business model, leading to its robust strength of late.
Strong momentum continues
Dollarama’s share price currently trades near an all-time high. Though some recent weaknesses have persisted, this is a company with plenty of potential for continued growth via its store-opening model as market share dynamics continue to shift in the world of Canadian retail.
The company stands out not only as an appealing choice for investors anticipating a recession but also as one of the premier discount retailer brands in the country. Unlike every discount retailer, which may not consistently provide the best value, Dollarama excels in delivering highly competitive deals.
Its strength lies not merely in selling smaller quantities at lower prices but in consistently offering exceptional value across various quantities, making it unique from other retailers. The retailer’s financial performance reflects its success; over the last year, its net profit margin is up 13.05%.
As a recession potentially nears, it is expected that the stock has the potential to maintain its up trend, possibly reaching $110 per share by the end of 2024. While 2023 witnessed inflation boosting store traffic for discount retailers, the normalization of inflation in the coming years doesn’t necessarily signal the end of Dollarama’s favourable conditions.
A recession will amplify the demand for affordable products. With the company’s ongoing expansion, In experts’ opinion, the current 28.6 times trailing price-to-earnings ratio justifies the investment, considering the robust defensive growth it offers.
Bottom line
I view Dollarama as one of the best options for value-oriented investors looking for defensive options in this market. For those wary of the new bull market that is upon us, this is a company with a valuation that makes sense operating in a market that should continue to show growth. That’s valuable right now.
